Playing Games With Sohu

Sohu.com (Nasdaq: SOHU  ) smoked the pros, the way it has consistently done over the past year. This morning's report was outstanding. Revenue soared 162% higher to $102 million. Earnings shot up sevenfold to $1.02 a share.

Perhaps the biggest surprise is that it Sohu's online gaming division -- fueled by the runaway success of its Tian Long Ba Bu multiplayer fantasy game -- is leading the way. Internet games now make up 47% of total revenue at Sohu, more than the company's bread-and-butter online advertising. A year ago, Sohu was a fringe player in this niche, relying more on its Web portal and wireless content services to bring home the bacon.

However, just as NetEase.com (Nasdaq: NTES  ) was able to transform itself into a gaming juggernaut after its initial success with wireless value-added services, Sohu is making a big splash in a crowded swimming pool.

Not that there's a water shortage. Shanda Interactive (Nasdaq: SNDA  ) , Perfect World (Nasdaq: PWRD  ) , Giant Interactive (NYSE: GA  ) , and NetEase have had no problem posting head-turning results in this niche.

Things are going so well for Sohu that the company is planning to take its online-gaming division public, under the name Changyou.com, to maximize shareholder value, while also freeing up the company to focus on its flagship online media endeavors.

One can't forget about Sohu's non-gaming businesses, especially given its role as the official Internet reporter for the upcoming Olympic Games in Beijing. The exposure alone will help Sohu land more visitors and advertisers.

Ultimately, investors are left with a company that's widening the gap between its reality and what Wall Street thinks is going on.

I figured Sohu couldn't improve on its first-quarter performance, when it earned 49% more than analyst expectations, but this morning, it came in 52% ahead of Wall Street's $0.67-per-share profit target.

 

EPS Est.

EPS Actual

% Difference

Q2 2007

$0.13

$0.15

15%

Q3 2007

$0.21

$0.25

19%

Q4 2007

$0.31

$0.39

26%

Q1 2008

$0.37

$0.55

49%

Q2 2008

$0.67

$1.02

52%

Spot the trend? See how Sohu is not only consistently topping expectations but also doing it by an increasing margin? That's as encouraging a sign as an investor is going to get in the market these days.

Tiang Long Ba Bu is a hot game, but this one is even hotter.

Other Olympic-style games to play in China:

NetEase and Shanda have been recommended to Motley Fool Rule Breakers newsletter service subscribers. If you carry a torch for stocks worthy of winning the gold, look into the service with a free 30-day all-access pass.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He owns no shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On July 28, 2008, at 1:35 PM, messi wrote:

    What a crock. How 'bout some information we don't have and leave out the obvious. Why is the stock selling off? Love to promote the stock when it's going up, but deaf to the cries of your followers when it tanks.

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